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China A-Shares ETFs to Capitalize on MSCI’s Index Changes

This article was originally published on ETFTrends.com.

Index provider MSCI will increase its exposure to China in many of its major indices, causing many money managers to re-adjust their China exposure and potentially raising demand for Chinese shares. Exchange traded fund investors can also capitalize on the move with country-specific plays focused on mainland China A-shares.

At the beginning of June, MSCI will for the first time add 222 domestic Chinese stocks, or A-shares, to its emerging market and global indices, reports Kate Beioley for the Financial Times.

The index changes will mean that passive funds with billions of dollars in assets under management will also need to make the necessary changes, shifting billions of dollars in investor money into China's market.

That move is also seen as beneficial to an array of exchange traded funds, including the VanEck Vectors ChinaAMC SME-ChiNext ETF (PEK) , VanEck Vectors ChinaAMC CSI 300 ETF (CNXT) , iShares MSCI China A ETF (CNYA) and db Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR) . These ETFs track China-listed company stocks on the Shanghai and Shenzhen Stock Exchanges.

Index Changes and Trade Tariffs

However, the index changes also comes at a time when the U.S. and China are struggling with escalating tensions over trade tariffs and speculation of a full out trade war. The indices increased exposure to Chinese markets will cause many international investors to gain greater exposure to the heightened risks associated with the tiff between Washington D.C. and Beijing.

Related: China ETFs Lag Global Markets as Investors Turn Risk-Off

MSCI previously refused to include China A-shares exposure to its indices due to the restricted, illiquid and heavy government influence of its markets. China has shown a track record of suspending trade on stocks that suffered sudden share price declines, locking investors out during periods when they most want to trade. Additionally, China has restricted trading to investors with special licenses in order to buy and sell A-shares.

The indexer said it planned to eventually incorporate the entire A-shares market in its indices, which could cause China's country weight to account for over 40% of the benchmark Emerging Market Index.

“This is a momentous move by MSCI,” Oliver Smith, portfolio manager at IG, told FT. “It is the start of what will probably end up being a very large Chinese representation in the Emerging Market and also the global index. China could end up being twice as large as the UK in the Global index due to its market cap.”

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